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Interview

with Sanusi Satar, Vice Chairman, Indonesian Geothermal Association – API

30.03.2012 / Energyboardroom

Can you tell our readers more about the Indonesian Geothermal Association (API) in terms of its history and main objectives?

The Indonesian Geothermal Association was established in the early 1990s. At that time, the main factor behind the creation of API was the realisation of the vast potential of geothermal energy in Indonesia. Ultimately, the idea was to partner up and work together with the government of Indonesia so that we could develop and take advantage of the potential found in Indonesian geothermal resources.

In terms of objectives, we have many. However, for this year, our main focus is to serve as a united voice advising and advocating for the healthy development of the geothermal business sector. Currently, we are concentrating on addressing two challenges facing the sector, namely policy and human resources. More specifically, the government has recently been in the process of revising law 27/2003 which wrongly classifies geothermal energy extraction as a mining activity, making it difficult for geothermal energy companies to enter various forested areas where most hotspots are located. API aims to provide an advisory role to the government in its efforts to review this law in order to make energy reserves more accessible.

Moreover, the lack of qualified human resources is also limiting the development of the geothermal industry. When considering the government’s plans to develop approximately 4,000MW of geothermal energy in the near future and that for every 50MW of energy produced about 30 to 40 engineers are required, we are faced with significant shortage of qualified personnel and therefore a serious challenge. From geologists and scientists to mechanical and electrical engineers, there is a severe lack of trained professionals in the geothermal sector, and this is something that needs to change. As a result, this is another important area that we are focusing our attention on by organizing seminars to attract talent as well as launching various training programs in order to raise the capacity and skill level of the geothermal work force.

How many members are represented by the Indonesian Geothermal Association (API)?

Currently we represent eleven different corporations. These include, among others, Chevron Geothermal (which is in fact the world largest producer of geothermal energy), PLN Geothermal, Pertamina Geothermal, Star Energy, Supreme Energy, Medco, Bakrie Power, Geo Dipa Energy, PT Rekayasa Industries and Origin Tata Power (OTP). Beside company members, API has also about 600 professional members.

All together, we conduct monthly meetings in which we report our activities and the current state of affairs to our Board of Directors who are the stakeholders of the industry (the developers, producers, contractors, etc…).

Considering that Indonesia holds 40% of the world’s geothermal power potential, what are the main challenges holding back the complete development of this potential?

There are numerous challenges facing the Indonesian geothermal sector. One such limitation is the low tariff levels under the Purchase Power Agreements (PPAs) offered by PLN to potential geothermal producers. These low tariffs make it unattractive for IPPs to enter the market as it does not offer an acceptable return on investment.

Another factor relates to the lack of governmental financial guarantees. Given the significant exploration costs involved in geothermal energy exploration, these guarantees are essential in order to assure potential developers an adequate return on their investment. Moreover, as I mentioned earlier, the impeding laws and policies relating to land ownership as well as exploration and production within protected or conserved forested areas are also hindering the expansion of the geothermal industry. However, we are working closely with legislators in addition to the Forestry Department to improve these conditions.

Finally, the absence of adequate infrastructure poses another significant shortcoming to the establishment of a thriving geothermal industry in Indonesia. As you may know, Indonesia is the world’s largest archipelago. In order to access some of these locations which hold significant geothermal reserves, and in order to deliver the power to where it is needed, large financial investments are required to build the necessary transmission and distribution infrastructure. For this reason, it is essential that the tariffs offered to developers are increased in order to compensate for the significant costs incurred and to make such projects financially attractive.

As a result, it comes as no surprise that since the 1980’s, geothermal development was quite slow and that Indonesia has only been able to tap into as little as 1,200MW of its 28,000MW geothermal energy potential. However, due to recent developments, we are growing more optimistic for the advancement of the sector. For example, Supreme Energy has recently been able to secure a landmark deal in which it has locked in a favourable tariff agreement with PLN in addition to a financial guarantee from the Ministry of Finance. We expect this to serve as a trigger and benchmark for potential companies and developers to take advantage of Indonesia’s vast geothermal resources.

What can the Indonesian government do, or is currently doing, to increase the investment attractiveness of the geothermal industry here in Indonesia?

The Indonesian government is certainly working hard towards assisting the development of the geothermal industry. As mentioned earlier, for example, the government is revising its laws to make the geothermal arena an easier market to enter. Moreover, I believe that owing to the recent breakthroughs in the issuance of government guarantees, we can expect to see more developers seeking and obtaining these guarantees in the near future. This should rapidly increase the level of activity and attractiveness of the geothermal sector.

Additionally, it is becoming apparent that PLN is encouraging the acceleration of IPP projects and is becoming more flexible in dealing with these developers. In fact, we have seen PLN commitment in every seminar and conference in which it is working closely with potential developers in order to find the best solution to speed up the various processes and make these investments attractive to them. After all, we are talking about a clean and renewable energy source that can replace our countries reliance on fossil fuels. I believe this commitment is necessary if Indonesia is to achieve its 2025 vision of having a 25% renewable energy mix and once again becoming a net exporter of energy.

This gives Indonesia much to look forward to and of course you spoke a lot about Supreme Energy. However, if there is any other interesting, future or current, geothermal energy projects you would highlight which ones would those be and why?

Pertamina Geothermal is definitely worth mentioning as they are highly aggressive, with fifteen geothermal blocks under development. Also, Star Energy is yet another prominent player. At Star Energy, they have signed a contract to provide 400MW of power to PLN. So far they have successfully delivered 227MW and they are currently adding a third unit with the capacity to deliver an additional 60MW. Shortly thereafter, we they will install the fourth and final unit that will bring the production capacity up to the required 400MW. Finally, Origin Tata Power is also noteworthy as they will be starting with the exploration stage later this year at Sorik Merapi Block in North Sumatera and also Chevron with their Soah Sekincau block in Lampung, as well as, another block like Sarulla in north Sumetra which is already in the stage for development of about 330 MW.

In terms of financing, what proportion of the investment is composed of foreign investments?

We have seen increased interest from local banks in investing in geothermal facilities. However, if we are talking about the exploration stages of geothermal production, which are the ones with the greatest risk, then so far all of the investments have originated from foreign investors, such as the World Bank and the Asian Development Fund. Unfortunately, local investors continue to be cautious and avoid such risky investments.

When can we expect the Indonesian people to gain confidence in their geothermal sector and invest their money?

I believe that in order to increase overall investment in the sector, we need to reduce the level of risk, especially in the initial exploration stages which involve the highest levels of risk.

Currently, the government has set up a fund which can be accessed by any of three of the following parties for the purpose of the development of geothermal plants: regional governments, commercial companies or Pertamina. If any of the lending parties is successful in locating geothermal reserves, then they can repay the borrowed funds over a long period of time. However, if any one of these parties is unsuccessful in locating geothermal reserves, then they bear the full exploration costs, which as I mentioned earlier can be significant, ranging from US $50 – $100 million. Essentially, I believe this is the core issue driving potential developers away as the risks involved can be substantial.

One way to reduce this risk is for the government to bear this risk by funding the exploration stages of the development process. Once proven reserves are located, the government can then tender these projects to willing commercial parties. In fact, the government is in the process of discussions with various stakeholders to draft these policies and regulations to make these changes and maximize the attractiveness of the geothermal sector in Indonesia.

Given all the current changes that are taking place in Indonesia’s geothermal sector, what can we expect to find if we came back to interview you in five years’ time?

Clearly the geothermal energy potential is there and the government will need to focus on this so it can achieve its ambitious 2025 vision of having a 25% renewable energy mix; of which at least 9,000MW will come from geothermal energy. Currently, geothermal energy only accounts for 1,200MW of energy production in Indonesia. By the year 2014, or the second phase of the Presidents two phase “fast-track” program, we expect to have added another 2,500MW of geothermal energy to that. Subsequently, we expect to continue adding to that until we reach our target of 12,000MW by 2025.

Over the next five years, I think you can expect to find that the government will be more focused on the geothermal industry in order to replace its reliance on fossil fuels. More specifically, you can expect to see the government issue an increased amount of tenders as well as reforming and drafting new laws in order to increase geothermal development. Finally, when consider the time consuming processes involved in setting up geothermal plants, from feasibility studies to drilling to plant construction, and the short time horizon for achieving the 2025 vision, we can expect to see that the government will be taking action quicker than what we have already seen.

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